In response to my latest posting concerning CORE inflation. Doug Henwood posted monthly rates from 1986 thru 1991. Accepting his numbers, my claim that inflation remained in a narrow band of "4.1 to 4.7 percent during the relevant period holds from April 1987 thru at least February 1990. (It was still at 4.7 percent in May 1990.) While there was a slight upward trend for this short time period -- going back to 1983 when the expansion began there is no trend over the entire expansion -- this is clearly not consistent with a fear of ACCELERATING inflation. As to the period beginning June 1990 when Henwood's figures show a further upward drift, I may check further. Maybe Utichelle has a misprint, but his CORE inflation series obtained from Merrill Lynch, shows a decline in the inflation rate for ALL of the first half of 1990. This is consistent with the Price Deflator which also showed that inflation for 1990 was below 1989. Even if Henwood's numbers are the more accurate for the second half of 1990 - - his 5.1 for April 1991 is the same as Utichelle's -- we still have a modest inflation increase. That is, a rise of two percentage points from 3.7 to 5.7 taking the most extreme numbers Henwood has, would not have a substantial effect on either consumers or manufacturers. This does, however, have a dramatic effect on bond holders. A simple numerical example will illustrate this: Take a long-term bond which yields $100 in interest yearly. If the longterm rate is 7 percent, this bond will sell for 100/0.07= $1428.57. If the interest rate rose by 2 percentage points to 9 percent, the price of this bond will decline to 100/0.09=$1111.11. Thus as a result of even this modest increase in inflation, the value of longterm bonds declnes by 22.22 percent -- matching the 22.22 percent difference in interest rates.
